# Questions For Critical Thinking 7

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Questions For Critical Thinking 7
BUSI 620

Salvatore's Chapter 14:

a. Discussion Questions: 12 and 15.
b. Problems: spreadsheet problems 1 and 2.

Note:
1. Spreadsheet problem 1: Use table 14-4 as reference.
2. Spreadsheet problem 2: Use tables 14-5 and 14-6 as reference.

Discussion Question 12: What is the rationale behind the minimax regret rule? What are some less formal and precise methods of dealing with uncertainty? When are these useful?
The rationale behind the minimax regret rule is to decrease the risk involved with business decisions and minimize the maximum regret or opportunity cost related from those decisions (Salvatore, 2011). The regret that is linked with the decision is determined by subtracting
The probability distribution of conditions is as follows:
Conditions: Poor Good Excellent
Probability: 40% 50% 10%
(a) Using Excel, calculate the expected value of each project according to this criterion.
(b) Assume that the individual’s utility function for profit is U(X) = X – 0.5X^2. Calculate the expected utility of each project and identify the preferred project according to his criterion.
(c) Is this individual risk averse, risk neutral, or risk seeking? Why
a) Project A: (\$0)(0.4) + (\$4)(0.5) + (\$8)(0.1)= Project A \$2.80 Project B: (-\$2)(0.4) + (\$3)(0.5) + (\$4)(0.1) = (-0.8) + 1.5 + 0.4= Project B \$1.10
b) (\$0)(0.4) + (-\$2)(0.4)= -0.8 (-0.8)- 0.5 (-0.8)^2= (-0.8)-0.5* 0.64 (-0.8)-0.32= -1.12
c) This individual is risk averse due the individual encountering diminishing marginal utility of money during a fair bet but the expected utility of the bet appears to be negative (Salvatore, 2011).
Froeb et al.’s Chapter 17:

a. Individual problems: 17–1 and 17–4.

Individual Problem 17-1: You’re the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market opportunities: England, France, and Germany. If you enter the English market, you have a 0.5 chance of big success (selling 100,000 units at a per-unit profit of \$6), and a 0.2 chance of failure (selling nothing). If you enter the French market, you have a 0.4 chance of big success